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Business Logistics/Supply Chain—A Vital Subject

The supply chain is simply another way of saying “the whole process of business.”

Chapter 1CR (2004) Prentice Hall, Inc.

Warehousing

Warehousing

Transportation

Transportation

Vendors/plants/portsTransportation

Factory

Transportation Customers

Informationflows

The Immediate Supply Chain for an Individual Firm

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Logistics DefinedLogistics is the process of planning, implementing and controlling the efficient, cost-effective flow and storage of raw materials, in-process inventory, finished goods and related information from the point of origin to point of consumption for the purpose of conforming to customer requirements.

Council of Logistics Management

Supply Chain Management DefinedSCM is the integration of all activities associated with the flow and transformation of goods from raw materials through to end user, as well as information flows, through improved supply chain relationships, to achieve a sustainable competitive advantage.

Handfield and Nichols

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Demand forecasting

Purchasing

Requirements planning

Production planning

Manufacturing inventory

Warehousing

Material handling

Packaging

Finished goods inventory

Distribution planning

Order processing

Transportation

Customer service

Strategic planning

Information services

Marketing/sales

Finance

Supply Chain Management

Supply Chain Management

Logistics

Purchasing/Materials

Management

PhysicalDistribution

Activity fragmentation to 1960 Activity Integration 1960 to 2000 2000+

Demand forecasting

Purchasing

Requirements planning

Production planning

Manufacturing inventory

Warehousing

Material handling

Packaging

Finished goods inventory

Distribution planning

Order processing

Transportation

Customer service

Strategic planning

Information services

Marketing/sales

Finance

Supply Chain Management

Supply Chain Management

Logistics

Purchasing/Materials

Management

PhysicalDistribution

Activity fragmentation to 1960 Activity Integration 1960 to 2000 2000+

Evolution of Supply Chain Management

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Supply Chain Schematic

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The Logistics/SC Mission

Getting the right goods or services to the right place, at the right time, and in the desired condition at the lowest cost and highest return on investment.

Getting the right goods or services to the right place, at the right time, and in the desired condition at the lowest cost and highest return on investment.

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A Revised Strategy is Generating Great Top Management Interest

Historical perspective of distribution: “The last frontier of cost economies”

The contemporary view: Distribution is a new frontier for demand generation—a competitive weapon.

Peter Drucker, 1962

Both views are now important!

Both views are now important!

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C ustom ers

T ransporta tion

Inven to ryor supp ly source

C ustom er o rder p rocessing (and transm itta l)

C ustom ers

T ransporta tion

Inven to ryor supp ly source

C ustom er o rder p rocessing (and transm itta l)

Critical Customer Service Loop

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Category Percent of sales $/cwt.

Transportation 3.34% $26.52

Warehousing 2.02 18.06

Order entry 0.43 4.58

Administration 0.41 2.79

Inventory carrying 1.72 22.25

Total 7.65% $67.71

Physical Distribution Costs

Add one-third for inbound supply costs

Source: Herb Davis & Company

Logistics cost are about 10% of

sales w/o purchasing costs

CR (2004) Prentice Hall, Inc.

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4

5

6

7

8

9

10

1992

1994

1996

1998

2000

2002

Year

Da

ys

82

84

86

88

90

92

94

96

%

Order Cycle Time,Days

ProductAvailability--%ordersProductAvailability--% lineitems

Customer Service Performance

Source: Herb Davis & Company

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Costs are high About 10.5% of GDP domestically About 12% of GDP internationally A range of 4 to 30% of sales for individual firms, avg. about 10% A high as 70-80% of sales if purchasing and production are

included

Customers are more demanding of the supply chain Desire for quick response Desire for mass customization

An integral part of company strategy Generate revenue Improve profit

Logistical lines are lengthening Local vs. long distance supply

Logistics is a key to trade and an increased standard of living Law of comparative economic advantage applies

Logistics adds value Time and place utilities

Significance of Logistics

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•Costs are lower than K-Mart or Target Stores

•CEO is a former logistician•Wal-Mart is the largest retailer in

the world!

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Effect on Logistics Foreign Outsourcing

ProfitG & A

Marketing

Logistics

Overhead

Materials

Labor

Profit

G & A

Marketing

Logistics

Overhead

Materials

Labor

Tariffs

Increase

Reduction

Increase

Domestic sourcing Foreign sourcing

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Scope of the Supply Chain for Most Firms

Physical distributionPhysical supply(Materials management)

Business logistics

Sources ofsupply

Plants/operations Customers

• Transportation• Inventory maintenance• Order processing• Acquisition• Protective packaging• Warehousing• Materials handling• Information maintenance

• Transportation• Inventory maintenance• Order processing• Product scheduling• Protective packaging• Warehousing• Materials handling• Information maintenance

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Primary- Setting customer service goals- Transportation- Inventory management- Location

Secondary, or supporting- Warehousing- Materials handling- Acquisition (purchasing)- Protective packaging- Product scheduling- Order processing

Key Activities/Processes

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FocusCompany

Suppliers

Supplier’ssuppliers

Customers

Customers/End users

Acquire Convert Distribute

The Supply Chain is Multi-Enterprise

Product and information flow

Scope in reality

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Reality of SC Scope

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SUPPLYCHAIN

MANAGEMENT

Inte

rfunc

tiona

l coo

rdin

atio

n

Interorganizational coordination

Activity and processadministration

The Multi-Dimensions of SC

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PL

AN

NIN

G

OR

GA

NIZ

ING

CO

NT

RO

LL

ING

Transport Strategy• Transport fundamentals• Transport decisions

Customer service goals

• The product• Logistics service• Ord. proc. & info. sys.

Inventory Strategy• Forecasting• Inventory decisions• Purchasing and supply

scheduling decisions• Storage fundamentals• Storage decisions

Location Strategy• Location decisions• The network planning process

PL

AN

NIN

G

OR

GA

NIZ

ING

CO

NT

RO

LL

ING

Transport Strategy• Transport fundamentals• Transport decisions

Customer service goals

• The product• Logistics service• Ord. proc. & info. sys.

Inventory Strategy• Forecasting• Inventory decisions• Purchasing and supply

scheduling decisions• Storage fundamentals• Storage decisions

Location Strategy• Location decisions• The network planning process

Study Framework

The focus is here

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Customer service goals The product Logistics service Information sys.

Inventory Strategy Forecasting Storage fundamentals Inventory decisions Purchasing and supply

scheduling decisions Storage decisions

Transport Strategy Transport fundamentals Transport decisions

Location Strategy Location decisions The network planning process

The Logistics Strategy Triangle

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PRODUCTION/OPERATIONSSample activities: Quality control Detailed production scheduling Equipment maint. Capacity planning Work measurement & standards

LOGISTICSSampleactivities:Transport Inventory Order processing

Materials

handling

Interfaceactivities: Product scheduling Plant location Purchasing

MARKETINGSampleactivities: Promotion Market research Product mix Sales force management

Interfaceactivities: Customer service standards Pricing Packaging Retail location

Production-logisticsinterface

Marketing-logisticsinterface

Relationship of Logistics to Marketing and Production

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Relationship of Logistics to Marketing

Product

PricePromotion

Place-Customer service levels

Inventory carrying costs

Lot quantity costs Order processing

and information costs

Transport costs

Warehousing costs

Ma

rke

tin

gL

og

isti

cs

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Relationship of Logistics to ProductionCoordinates through scheduling and strategy—make-to-order or make-to-stock

An integral part of the the supply chainAffects total response time for customersShares activities such as inventory planning

Costs are in tradeoffProduction lot quantities affect inventory levels and transportation efficiency

Production response affects transportation costs and customer service

Production and warehouse location are interrelated

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Logistics/SC in Diverse Areas

Manufacturing—most common

Environment—causing restrictions

Service—emerging opportunities

Non-profits—little explored

Military—long history

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Contemporary Logistics TermsValue stream/logistics processQuick response and flexible manufacturingMass customizationSupply chain management/collaborative logisticsReverse logisticsService logisticsContinuous replenishmentLean logisticsIntegrated logistics